Tagged: GREECE

Bad Economic News, Part 1

Yankees baseball legend Yogi Berra coined the proverbial phrase “It ain’t over ’til it’s over”. That is certainly true about the European economic crisis. This past week saw a crop of bad news from the Old World. Nothing very dramatic – and certainly nothing that should surprise regular readers of this blog – but nevertheless bad news. In this first of two parts, let’s look at a report from the EU Observer:

The eurozone appears to have come back onto the markets’ radar amid low inflation, poor economic news from Germany, and Greece’s bailout exit plans. Greece’s long-term borrowing costs went above 8 percent on Thursday (16 October) – their highest for almost a year – as investors took fright at the fragile political situation in the country. The government in Athens has tried to shore up popular support by suggesting it will exit its bailout programme with the International Monetary fund more than a year early.

There is an important background here. The bailout program had three components:

1. The Greek government will do everything in its power to combine a balanced budget with protecting as much as possible of its welfare state against the economic depression;

2. In return for the Greek government’s tax increases and spending cuts, the International Monetary Fund, the European Union and the European Central Bank provided loans that kept the Greek government afloat cash-wise;

3. The only metric used to measure the success of bailout policies is the stability of a balanced government budget.

If GDP did not grow, if unemployment was at 30 percent, if more than half the young in Greece had no job to go to… none of that mattered. As a result, there has been no structural improvement of the Greek economy; government has not reduced its burden on the private sector – quite the contrary, in fact. Welfare systems have been reduced, but higher taxes have prevented welfare recipients from transitioning into self sufficiency.

As a result, the social situation in Greece is almost unbearable. The political reaction has come in the form of a surge for parties on the extreme flanks of the political spectrum. In my book Industrial Poverty I explain in detail what happened in Greece, what brought the country down from the heights of European prosperity to permanent stagnation. Today, sadly, the country is little more than a macroeconomic wasteland.

It is with this in mind that one should approach the news that Greece is considering leaving the bailout program. The coalition government is under enormous pressure to save the nation itself, to keep parliamentary democracy in place and to inject some sort of life into the economy. If they fail either of two extreme political movements will take over – the Chavista communists in Syriza or the Nazis in Golden Dawn.

International investors know this and are understandably scared. In their mind the bailout is the least of available evils; in reality, as I explain in my book, the attempts at balancing the budget and saving the welfare state in the midst of the crisis are the very policies that keep Greece from recovering; weak signs of a minor recovery earlier this year have yet to materialize into anything other than the “beaten dog” syndrome often following protracted periods of austertiy.

This is the very reason why Greece is now considering leaving the bailout program. They cannot continue forever to try to muddle through with an economy deadlocked in depression and a democracy so fragile that it has brought the first Nazis into a parliament in Europe for the first time since World War II.

However, as the EU Observer explains, the Greek government is caught between a rock and a hard place – as are other hard-hit euro zone economies:

But the recent announcement spooked investors, unconvinced that Greece can stand alone. Long-term borrowing costs also jumped in the weak periphery states, Spain, Italy, and Portugal. The market jitters – while not comparable to the height of the eurozone crisis in 2011 and 2012 – come as the eurozone’s main economies are once again at odds over policy responses.

France also belongs on that list, primarily for its typically European attempt at leaving the bailout program. Its government tried to leave the bailout path for a left turn into the quagmire of government expansionism. Thinking that more government spending, on top of the largest government spending in the world, could in fact bring about a recovery, the French socialists who won the 2012 elections scoffed at the EU balanced-budget rules and went full speed ahead with their government-expansionist agenda.

Two years later that agenda has hit a brick wall. Massive tax increases, supposed to pay for some of the new government spending, have only resulted in an exodus of brain power and entrepreneurship. The French GDP is standing more still than the Eiffel Tower.

In fact, the EU Observer notes,

France and Italy are fighting a rearguard action for more flexibility saying budget slashing will condemn them to further low growth. Paris is on collision course with both Berlin and the European Commission after having indicated that it wants an extra two years to bring its budget deficit to below 3 percent of GDP. Italy, meanwhile, has submitted a national budget for 2015 which brings the country to the edge of breaking the rules.

The French challenge to the budget-balance rules compounds the uncertainty emanating from the talks in Athens about a Greek bailout exit. It is more than a theoretical possibility that at least one of these countries leaves the euro zone in the next two years, and does so for a combination of political and economic reasons. That would be an institutional change to the European economy – and really the global economy – of such proportions that no traditional quantitative analysis can render justice to a forecast of its effects. It is therefore entirely logical that global investors are growing more uncertain and as a result demand higher risk premiums.

As the icing on the uncertainty cake, informed investors know that Marine Le Pen may very well become France’s next president. If she wins in 2017 her first order of business is in all likelihood going to be to exit the euro zone and reintroduce the franc. On the one hand that could be an “orderly” exit; on the other hand it would have ripple effects throughout the southern rim of the euro zone to the point where the very future of the common currency is in grave danger.

In summary: mounting uncertainty about the future of the euro is being mixed with growing uncertainty about the macroeconomic performance of the member states of the currency union.

Stay tuned for the second part about the bad news out of Europe.

Ebola and Socialized Health Care

When government creates a spending program, it also makes a promise to taxpayers. So long as the sum total of those promises is small and government limited to protecting life, liberty and property, we have good reasons to believe that government can deliver on its promises. However, the more promises government makes, the fewer of those promises it will be able to keep. As government promises reach into income redistribution and services like health care, the distance between promise and provision grows into a chasm.

That chasm has opened up across Europe. As millions upon millions of Europeans have discovered, a broken government promise is not just a theoretical construct. It is harsh reality. First they were lured into dependency on government by lavish promises of being taken care of, then government walked away from its promises  – and did so without offering people a route to an alternative.

The price is paid by the people. As government fails to deliver as promised, and taxes and regulations supporting the government monopoly all remain in place, people have nowhere else to go but down. A permanent blanket of stagnation slowly descends upon the economy and a new form of industrial poverty replaces prosperity and a bright future.

This is, again, not just theory. It is harsh reality. When government asks people to trust it, and then fails to provide that trust, even ebola can slip through the cracks of the crumbling tax-funded promises. A story from the New York Times offers a chilling example:

The case is particularly worrisome to health experts because Spain is a developed country that is considered to possess the kind of rigorous infection control measures that should prevent disease transmission in the hospital. Although the Ebola epidemic has killed hundreds of doctors and nurses in West Africa, health officials in Europe and the United States have reassured the public repeatedly that if the disease reached their shores, their health care systems would be able to treat patients safely, without endangering health workers or the public.

The story also suggests:

While the risk to hospital workers is thought to be far lower in developed countries, the infection of the Spanish nurse, along with the missteps in dealing with Ebola in Dallas, exposes weak spots in highly praised defense systems.

There is a major difference between the American and Spanish cases. In Dallas, health care workers approached the patient under the assumption that the U.S. government was right when, back in July, it assured Americans that there was no real risk that ebola would ever spread to the United States. Trusting their government, the health care professionals in Dallas used their professional skills as they have been trained, assuming that the people in charge of keeping our country safe were doing their job as promised.

Once the ebola case had been confirmed, however, our health care system, which still to a large degree is private and therefore has plenty of resources, went to work and contained what could have become a very serious outbreak.

Spain is a different case altogether. To begin with, the country has a virtually open border to northern Africa, with migrants coming daily across the narrowest stretch the Mediterranean. It is comparatively easy to travel from the epicenter of the ebola outbreak to the southern coast of Spain. But more importantly, the Spanish health care system, unlike the American, has suffered major spending cuts in the last few years. In December last year The Economist observed similarities between cuts in government health monopolies in Greece and Spain, with the Greek cuts leading to…

dramatic increases in HIV, mental illness, TB and the return of malaria. Greece made its cuts two years earlier than Spain did, so their impact became evident sooner. But the situation in Spain is just as worrying, warns Helena Legido-Quigley of the [London School of Hygiene and Tropical Medicine], who fears that if the government doesn’t change course soon, similar outbreaks could very well happen in Spain.

Specifically, The Economist notices, Spanish health care spending…

was reduced by 13.7% in 2012 and by 16.2% in 2013 (including social services). Some regions imposed additional cuts as high as 10%. As a result a significant part of the Spanish population is excluded from basic health care, which could in turn lead to public-health problems for the entire population.

As part of the 2012 cuts, the Spanish government reduced tax subsidies for medicine, a measure that was also used in Greece. The effect of these cuts is that many people simply do not get the medicine they have been prescribed – since there are no private alternatives, people are locked in to a defaulting government monopoly. Because of the high taxes needed to fund the welfare state, few Spanish families have enough money to pay privately for what they have already paid for through taxes.

With resources at hospitals being tightened, access to health care rationed and a culture of austerity spreading through the entire health care system, it is not out of the realm to ask to what extent Spain is at risk of an ebola outbreak because its government made a promise to its people that it cannot afford to keep. As an example, the New York Times story cited earlier reports that in order to treat one single ebola patient, a hospital in Madrid turned an entire floor into a sealed-off isolation unit. In a health care system with tight resources, that means the hospital has to move numerous other patients to other units or even other hospitals. This in turn means increasing the number of patients per room, or (as in Sweden) putting patients in storage rooms, lunch rooms, corridors or even patient lunch cafeterias.

In a private health care system, the supply of resources is dynamic. It depends on the public need for health care and is funded through a multiple of sources, such as insurance plans, out-of-pocket payments and charitable donations. Competition and patient choice guarantee that, over time, there is always provision of health care for all patients.

By contrast, in a government health monopoly resources are static and rigidly dependent on how much taxes the legislature can squeeze out of the private sector. If, in theory, health care were the only thing government provided, it may not be an unbearable burden to taxpayers. However, a single-payer government health monopoly is the crown jewel of the welfare state, and therefore adds up to an excessive tax bill for the private sector.

The effect is inevitably a long-time economic decline and the kind of welfare-state crisis that Spain is now experiencing. The pressing question now is: can a rationed government health monopoly protect a modern, industrialized nation from a deadly disease?

EU Economy Going Nowhere

There is no better macroeconomic “health indicator” for an economy than private consumption. Not only is it the largest part of GDP, but private consumption also reflects well the overall sentiment of households. Since households are important spenders, taxpayers and workers all baked into one type of economic unit, the growth rate of private consumption is the best quick-check “wellness test” of an economy. (A more detailed understanding of the shape of an economy obviously requires a more detailed macroeconomic and microeconomic analysis.)

Since I have recently reported on how the European economic recovery has not materialized, I figured it would only be fair to perform a quick-check macroeconomic “wellness test”. Alas, I pulled private consumption data from Eurostat, and I made sure to get inflation-adjusted figures based on a price that is relatively distant in time. (If the index year is close in time there can be growth distortions based on the mere proximity to “year zero”.) I also selected quarterly data, which is not commonly used for this purpose. My motivation, though, is that if the quarterly data is not seasonally adjusted it allows for a more frequent communication of household sentiments.

You would expect this type of data to be available from every EU member state for every quarter you might want it. I often encounter that attitude from consumers of public policy research: somehow they assume that every piece of statistical information anyone could ever want is readily available within two clicks into the internet. That is not the case, though, and the reason is simple. Quality statistical material requires careful data collection, according to detailed and very rigid collection methods; it requires methodologically rigorous processing according to standards defined not just for this piece of information, but for every comparable piece of information in the world.

There are other methodological restrictions on statistical information that contribute to the production cost. We should actually take this as a sign of quality for the data we have access to; I always get suspicious when scholars claim to have produced large sets of quantitative information in short periods of time – it often leads to bombastic conclusions that later prove to be little more than a house of cards built on clay feet.

Anyway. Back to the European economy. For reasons of high quality standards and therefore reasonably high production costs for national accounts data, not every EU member state reports the kind of consumption data analyzed here. Figure 1 below reports real private consumption growth in 24 EU member states from 2002 through 2013:

Figure 1

C pr EU 24

The growth rates, again, are inflation-adjusted rates per quarter, over the same quarter the year before. This means that the blue line reports a rolling annual growth rate, updated quarterly. As such it helps us pinpoint business cycle swings with good accuracy. The  most obvious example is that private consumption nosedives in the second quarter of 2008: after having averaged an acceptable two percent per year from 2003 through 2007, private consumption literally came to a standstill over the next five years. From 2008 through 2012 the average growth rate was zero percent.

The difference may not seem like much, but for two reasons it would be wrong to draw that conclusion. First, a one-percent reduction in private consumption equals a decline in spending worth a bit over two million jobs in the EU-28 economy. This does not mean that two million Europeans automatically lose their jobs if households cut spending by one percent – the economy is more dynamic than that. But it does mean that if private businesses lose sales over a sustained period of time they cannot afford to keep all of their employees. At the macroeconomic level this eventually translates into, roughly, two million jobs per one percent private consumption (measured in current prices).

In other words, even seemingly small fluctuations in household spending can have major effects on the economy.

Secondly, sluggish private consumption means that the economy is not evolving. If the growth rate falls below two percent, then at least in theory consumers are no longer improving their standard of living. I explain in detail how this works in my book Industrial Poverty (out August 28); a very brief explanation is that it takes a certain level of sustained spending to maintain one’s standard of living. As products get better and other factors affect the quality of our consumption, we have to grow our outlays by a certain minimum rate just to make sure we keep our standard of living intact.

For the first half of the 12 years reported in Figure 1, households in the 24 selected EU member states managed to maintain their standard of living; on the other hand, for the second half of the period they did not maintain that standard. With an average growth rate of zero (adjusted for inflation) the theoretical loss of standard of living was two percent per year.

In addition to creating unemployment, this protracted sluggishness in household spending is a long-term prosperity downgrade for Europe’s consumers. What is even worse is that there are still no signs of a return to higher growth rates. While 2013 saw an average .8 percent growth in the EU-24 we discuss here, that came on the heels of ytwo years of negative growth (-0.6 percent). There was a similar, and bigger, uptick in 2010 (1.5 percent) that proved to be an anomaly compared to the two years before and after.

Furthermore, data for the first quarter of 2014, which is available for 20 of the 24 EU member states, shows a rise in inflation-adjusted private consumption in three countries only. While it is good to see a rise in Greece and Spain, which have been the hardest hit by the crisis (Austria is the third) this is far too isolated and far too small to be the turnaround many economists have hoped for.

More importantly, this is where the use of quarterly data can spook the careless observer. Spanish private consumption, which is up by 3.1 percent in the first quarter of this year, has a pattern of growing every other quarter. Since it was down 1.3 percent in the last quarter of 2013, this only means that the economy is on track with its historic path (which, sadly, means zero growth over the 16 quarters in 2010-2013). The rise in Greek private spending is part of a similar pattern, coming on the heels of a 2010-2013 average of -1.1 percent.

Bottom line, then, is that European households are unwilling or, more likely, unable to unleash that spending spree the European economy needs so badly. This should not surprise any regular reader of this blog, but it will in all likelihood be a surprise to those who live in the illusion that big government and the welfare state are the blessings that prosperity is built from.

European Democracy in Peril

As the dust settles on the elections to the European Parliament, a somewhat schizophrenic conclusion is emerging:

  • on the one hand voters expressed their skepticism toward the EU project and rejected, overall, the notion of a continuous, business-as-usual expansion of the EU into a new, gigantic government bureaucracy;
  • on the other hand the rejection of even bigger government was partly expressed in a form that, absurdly enough, may very well pave the way for another, even uglier form of government expansion.

The outcome of the election is more dramatic than most media outlets have yet realized. Put bluntly, this election was a loss for European parliamentary democracy and a gain for authoritarianism of a kind Europe has not suffered from for a quarter century now. But as painful as it is to acknowledge, the real winners of this election were communists and aggressive nationalists – also known as fascists.

There is no mistaking the outcome: voters spoke, and numbers changed in the European Parliament. Political parties with a traditional commitment to parliamentary democracy lost dramatically, with conservatives and liberals losing more than one fifth of their seats. At the same time, communists and radical socialists of assorted flavors increased their parliamentary presence by one third.

Add to those gains the big inroads made by aggressive nationalists and fascists.

Europe’s political elite may want to ignore this, but the most dangerous reaction to this election would be to turn a blind eye to what voters did: they passed power out from the democratic center to the outer rim of the political spectrum. There, communists and fascists stood ready to scoop up voters who are deeply dissatisfied with, well, just about everything from unemployment and economic stagnation to immigration and “inequality”.

Europe is now at a fork in the road, one that will decide the fate of a continent that is home to half-a-billion people. But before we get there, let us take a look at what actually happened in the election.

Communist parties did well, especially in southern Europe where the Great Recession has done its biggest damage. In Greece, the radical leftist party Syriza, which sees Hugo Chavez’ Venezuela as a political role model, took 26 percent of the vote and became the largest Greek party in the EU Parliament. In Italy, incumbent prime minister Renzi’s leftist Democratic Party got 40 percent of the vote. Portugal’s old communist party, rebranded as socialists, came in first with 31.5 percent of the vote. In Spain, a radical socialist coalition took ten percent of the votes, placing them third in the election.

But it was not just in southern Europe that communists, old or new, did well. Ireland’s scary-left and historically terrorist-affiliated Sinn Fein got a frighteningly large 17 percent of the votes.

Sweden is an example of how refurbished communists have shown remarkable resiliency in the past two decades. Their radical left is split among three parties, which taken together is more than the country’s traditionally dominant social democrats got. The three radical leftist parties are: the Greens (15.3 percent of the vote), the renovated-communist Leftist Party (6.3) and the new, aggressively socialist Feminist Initiative (5.3).

Altogether, the entire leftist spectrum – from vanilla-favored social democrats to hardline Chavista leftists – held their lines in the European Parliament, in the face of stiff competition. But as indicated by the above mentioned examples, the radical flank within the leftist block made big advancements. Their European Parliament group, called GUE/NGL, increased its number of seats by one third. This number could increase even more when some small, new parties from across the EU choose affiliation.

The underlying message in the shift toward the hard left is that Europe’s voters – already living under the biggest governments in the free world – have forgotten what happens when government grows beyond the boundaries traditionally respected in Western Europe. Perhaps the most conspicuous signal of Europe’s communist amnesia is embedded in the seven percent voter share that Die Linke got in Germany. They are the old Socialist Unity Party, in other words the party that ruled East Germany with an iron fist and back-up from Soviet tanks throughout the Cold War. Die Linke is fiercely anti-capitalist and shares Syriza’s adoration for what Hugo Chavez did to Venezuela.

The fact that Die Linke only got 7.4 percent should be considered in the context of the fact that Germany’s Green Party captured 10.7 percent of the votes. This puts the radical left in Germany at 18.1 percent, a share that grows even more in view of the fact that the SPD, the social democrats, are now parked at a lowly 27 percent voter share. If the social democrats in Germany continue to decline, the combined voter share of the Green Party and the old East German communists could easily exceed 25 percent in the next German national elections.

A surging radical left in the European Parliament will have profound consequences for European politics, but it will also affect Europe’s relations to the United States. More on that in a moment. First, let us take a look at the other flank of the authoritarian lowland.

Known under its less sophisticated label “fascism”, authoritarian nationalists made frightening advancements in the election. Most notorious, of course, is the victory in France for Front National under Marine Le Pen’s stewardship. Her polished version of the party her father founded won a stunning 25.4 percent of the vote, putting them decisively ahead of the nearest competition.

Ten years ago, Front National was little more than a punch line in a political joke. Yes, Jean-Marie Le Pen technically came in second in a presidential run-off against incumbent Jacques Chirac, but the entire campaign was of the same kind as if the Democrats had put up Ralph Nader against George W Bush in 2004. (No other comparison intended between Nader and Le Pen, of course.) Today, Front National is at a point where their leader can confidently demand that President Hollande dissolve the national parliament for new elections. That is not going to happen, but the demand sent shivers through the French political establishment.

It should. Marine Le Pen is no longer just a French political contender – she is in fact not just the leader of what is currently the largest political party in France. She is emerging as the leader of a new, bold, aggressive nationalist movement in Europe. Her party group in the European Parliament will incorporate outspoken fascists such as Hungarian Jobbik (which came in second in Hungary and apparently has its own uniformed party corps). Some media reports state that Front National and Jobbik are already in talks with each other on how to cooperate in the European Parliament.

Another of Le Pen’s new friends is Golden Dawn, which in the European election confirmed its position as Greece’s third largest party. Despite extensive legal challenges and elected officials of the party currently being incarcerated, Golden Dawn refuses to go away. More than likely, their strong support among police and the military will be enough to let them return, emboldened and empowered, to both the Greek and the European political scene.

With Front National, Jobbik and Golden Dawn as their pillars, the aggressive nationalist party group in the European Parliament could indeed turn out to be a vehicle for the rebirth of European fascism. The deciding factor will be where Europe’s rapidly rising patriotic parties will land. This is a different breed than the aggressive nationalists, consisting of Euro-skeptic parties, best exemplified by Britain’s UKIP. There is now a whole range of parties in Europe that fall into this category, such as PVV in the Netherlands, Danish People’s Party, Swedish Democrats, True Finns, Alternative for Germany and Austria’s People’s Party.

Some of these parties did remarkably well: both UKIP and the Danish People’s Party won their countries’ respective European Parliament elections. The Swedish Democrats scored almost ten percent of the votes, double what they got in the national elections in 2010. Alternative for Germany surprised many by capturing as much as seven percent of the votes, while there was disappointment among PVV supporters in the Netherlands as their party only got 13 percent and a third place.

It is not an exaggeration to say that this new group of patriotic parties holds Europe’s fate in their hands. Their ideological foundation spans from “basically libertarian” as Nigel Farage once called UKIP to welfare-statist Swedish Democrats. But they all have in common that they are committed to traditional, European parliamentary principles. This sets them apart from the aggressive nationalists whose political visions do not exclude a new full-scale fascist experiment.

If some of the patriotic parties are lured into cooperation with Front National, Jobbik and Syriza, there is a significant risk that Europe, within the next five years, will see a continent-wide fascist movement. There are other aggressive nationalist parties lurking in the political backwoods, ready to capitalize on voter disgruntlement with existing political options. Among those, Germany’s National Democratic Party, NDP, actually captured on seat in the European Parliament this time around.

With the history of Front National in mind, only imagination sets boundaries to what the NPD can accomplish.

Another example is the Party of the Swedes. Originally called the National Socialist Front and merged with violence-prone Swedish Resistance Movement, the Party of the Swedes is waiting for the patriotic, parliamentarian Swedish Democrats to fail to deliver on their voters’ Euro-skepticism. While waiting, Party of the Swedes is gaining parliamentary skills at the local level around Sweden. That experience can then be used in a run for national office – and eventually to reach for the European Parliament.

While fundamentally anti-democratic movements gained ground, the surge of democratic, patriotic parties is the only silver lining in this European Parliament election. This group is still small compared to the traditional center-right parties known under their acronyms EPP (center-right) and ALDE (center-liberal). But these democratic, patriotic parties hold the map in their hands to Europe’s future. If the EPP and ALDE choose to cooperate with them, then Europe will choose the stable, democratic road to the future.

If, on the other hand, the Europhiles in EPP and ALDE continue to ignore the growing, sound, democratic version of Euro-skepticism, and instead charge ahead with their project of a grand European Super-Union, the voter reaction will be fierce and potentially catastrophic. At that point, voters will seek other, much less palatable outlets for their skepticism or outright resistance to the European project.

If leaders of Europe’s conservatives, liberals and social democrats do not pay attention to what actually happened in this European election, they will do Golden Dawn, Jobbik, NPD and Front National a service they will regret for the rest of their lives.

It does not matter if Marine Le Pen is a fascist or an aggressive nationalist. Her surge to pan-European prominence has uncorked a bottle where black-shirted genies have been locked away for decades. History has shown how relentlessly those genies can intoxicate cadres of voters and how viciously they can tear down the institutions of parliamentary democracy.

Europe is playing with fire. The only thing that stands between the torch of fascism, lit up in this election, and a pan-European bonfire is the skill and insightfulness of a small group of Europhile politicians and bureaucrats in the hallways of power in Brussels. So far the leaders of EPP and ALDE, as well as the European Commission, have thoroughly ignored the rise of Euro-skepticism around the continent. So far they have been completely tone deaf to widespread popular frustration with the EU project.

Hopefully, they will come around and start listening to their critics. Hopefully they will let Nigel Farage be the recognized voice of Euro-criticism. But time is running out. If nothing decisively happens soon, the same trend that was set in this election will begin to show up in national elections.

In 2017, the Palais de l’Elysee could have a new tenant – Marine Le Pen.

Totalitarians Gain in Greek Elections

And when times got tough, there was just about enough

But we saw it through without complaining

For deep inside was a burning pride

In the town I loved so well

Luke Kelly, The Dubliners

The current economic crisis in Europe is not the first. Mankind has experienced good and bad economic times for as long as organized economic activity has been around. If we had the proper documentation we could probably study business cycles as far back in time as ten thousand years. While we cannot say for certain how people far back in history handled economic recessions and depressions, we do know from recent history (the past few hundred years) that we as a civilized, intelligent species are able to go through tough times without resorting to revolutionary measures.

Yet today, when Western Civilization is supposed to be at the very height of its sophistication, the gut reaction from people living under serious economic conditions seems to be to embrace political extremism. The emerging results from the local elections in Greece is a case in point. From the EU Observer:

The radical-left Syriza party is ahead in the first round of voting in Greek local elections on Sunday (18 May), while exit polls suggest a boost for the neo-Nazi Golden Dawn in some areas. Syriza is set to take Athens and the surrounding Attica region away from the ruling coalition of the conservative New Democracy and its socialist partner, Pasok.

Syriza is ideologically affiliated with the Venezuelan socialist party. Their ideal economic system is Chavista socialism, with widespread government ownership, radical redistribution measures, and both fiscal and monetary policy that completely ignore the laws of economics. Their ambitions do not stop at simply restoring the (failed) European welfare state – they want to make Greece the first European country to limp along in the left footsteps of Hugo Chavez.

The fact that they make progress in the Greek elections is troubling, but hardly surprising. They have made steady advancements in Greek elections for the past couple of years. Together with other radical leftist parties in Europe they are likely going to gain significantly in the European Parliament elections later this month.

Equally troubling is the fact that Greek voters also allowed the openly Nazi Golden Dawn to advance. They are the first Nazis to set foot in a European parliament since the 1930s, they have made a name for themselves as openly racist and nationalist, and they want to socialize large sectors of the Greek economy. On top of that, they are part of a growing radically nationalist movement across Europe, one that has not yet gained the same momentum as the Communist surge that Syriza is part of. However, it is only a matter of time before the two are equally powerful – and equally threatening to Europe’s future political stability.

Again, the gasoline that is fueling that rise of totalitarianism in Europe is – yes – the ongoing economic crisis. Back to the EU Observer article:

Prime Minister Antonis Samaras’ conservative-led coalition came to power two years ago to steer Greece out of its debt-ridden crisis. But austerity measures imposed by the troika of international creditors on Greece, and then implemented by Samaras, led to rocketing unemployment and a 40 percent drop in purchasing power since the start of the crisis four years ago. Jobless rates published earlier last month show more Greeks are out of work compared to last year.

As I noted back in April, the Greek economic crisis is stabilizing, not going away. This, again, explains why extremism is on the march in Greece – instead of “seeing it through” and relying on “a burning pride” to carry the day, Greek voters rush to those who promise revolutionary solutions. The EU Observer again:

The Wall Street Journal reports it will be the first time in almost 40 years that a [center-right] New Democracy candidate will not be in the second [election] round in Athens. … In a further blow to Prime Minister Samaras, the Guardian newspaper reports neo-Nazi Golden Dawn candidate for Athens’ mayor could come in third with 15.5 percent of the votes. Their candidate for prefect in Attica obtained around 10 percent of the votes. Despite being under investigation for its criminal activities, Golden Dawn attracts voters because it is seen as reaching out to those most affected by the crisis. “Everyone I know is voting for Golden Dawn because they are starving and jobless,” a Greek voter told the Guardian.

Greece is the most extreme example in Europe, but it is far from the only case of dangerous political radicalization. Again, keep a watchful eye on the European Parliamentary elections, which take place in the window of May 22 – May 25. As current opinion polls show, there is a clear risk that totalitarian nationalists (not to be confused with libertarian-leaning patriots like UKIP in Britain) and equally totalitarian communists (not to be confused with traditional European social democrats) will be the biggest winners. That would be thoroughly bad for Europe, and the repercussions should echo all the way into the State Department in Washington, DC.

Europe’s Unemployment Frustration

Never bark at the Big Dog. The Big Dog is always right.

As expected, the harsh reality of the European economy is beginning to sink in with the political leaders of the EU. For a while, the narrative has been that the European economy is rebounding and that unemployment is falling. I have maintained all along that there are no signs of any such recovery, and on Friday Eurostat released a report that begins to backtrack from the unwarranted optimism. However, as the EU Observer reports, the narrative has changed somewhat, now putting focus on differences between member states rather than the absence of any downward trend across the EU:

Figures released on Friday (2 May) by the EU’s statistical office, Eurostat, indicate large differences remain in unemployment rates across member states. The eurozone unemployment rate was 11.8% in March 2014, stable since December 2013, but down from 12.0% in March 2013 With an 11.8 percent overall jobless rate in the eurozone, the chances of people landing a job remain low in countries like Greece and Spain when compared to Austria and Germany. At 26.7 percent, austerity-hit Greece still has the worst unemployment rate in the EU, followed closely by Spain with 25.3 percent. Austria at 4.9 percent and Germany at 5.1 percent have the lowest.

There is a good reason why the new story in Europe is about differences between member states rather than the overall trend. Figure 1 reports quarterly data on total unemployment, not seasonally adjusted, for the EU as a whole and for the euro zone specifically:

Figure 1

EU28euroU

Yes, there are differences between member states, but the differences become pointless of there is no overall positive trend in unemployment. Germany is a good example, with an unemployment rate at 5.5 percent in the first quarter of 2014. While this is low by European standards, it is important to note that there is no strong downward trend in these numbers. Yes, measured over the same quarter a year before (e.g., first quarter of 2014 compared to first quarter of 2013) the Germans do see a slow, weak but nevertheless visible improvement. However, the rate still fluctuates from quarter to quarter by as much as a half percentage point, showing somewhat of a weakness in the trend.

Figure 2 highlights further the lack of trend in unemployment:

Figure 2

EUselectStatesU

Most notably, Greece and Italy have not yet reported full data for the first quarter of this year. So far their trends point steady upward, though numbers that I reported previously on the Greek GDP give us reason to believe that unemployment will be flat in early 2014. Italy is a more uncertain case, partly due to growing talks about the country leaving the euro.

It is positive, no doubt, that both Spain and Ireland saw a decline in unemployment in the first quarter of 2014 (the second quarter in a row for Ireland with a decline). However, at the same time French unemployment is steadily on the rise, a fact that, given the size of the French economy, will have hampering effects on any possible recovery in other euro-area countries.

As we return to the EU Observer story, we can hear the frustration echo through the EU head quarters:

EU social affairs commissioner Laszlo Andor called for more investment into job creation. “The ultimate factor that will determine Europe’s economic future is whether we can hold together and further strengthen our Economic and Monetary Union, or whether we let weaker members of the EU and of our societies drift away,” he said. Earlier this year, Andor warned that one in four Europeans is at risk of poverty, despite unemployment figures dropping in some member states. Young people are the worst affected by the unemployment crisis. Only around one in four people of working age under 25 have a job. To offset the trend, the EU last summer launched its Youth Guarantee scheme with a promise to help the young find jobs, continue their education, or land a traineeship within four months of becoming unemployed or leaving formal education. EU money to support the scheme is primarily sourced from the European Social Fund (ESF).

Which is built by, and maintained by, Europe’s taxpayers. Instead of doing something about the high taxes and other factors that prevent Europe’s entrepreneurs from creating jobs, the EU taxes people more so it can give money to the young men and women who cannot get jobs because of the high taxes.

Of course, as the EU Observer story continues, spending taxpayers’ money to create jobs is about as hopeless a project as trying to ride a bicycle in zero gravity:

But given the scale of the problem, the EU plan has been criticised for being underfunded and lacking in ambition. The Brussels-based European Youth Forum in a study out in April on ten member states says the scheme has yet to live up to its promises. “It is a good way of tackling youth unemployment but effectively so far there hasn’t been enough ambition in it and enough political will in some member states to implement it properly,” said a European Youth Forum spokesperson.

Wrong. The reason why it has not yet been successful is because it is a government program, spending taxpayers’ money when taxpayers should really be allowed to keep their money and spend it as they see fit. Because of the high taxes across Europe, only countries with strong exports industries are able to pull ahead (Germany and Austria are good examples). Until government rolls back its presence in the economy – on both the spending side and the taxation side – Europe will be stuck with its disastrously high unemployment levels. Temporary changes up or down will not make any difference over time.

Greek Crisis: No End in Sight

Europe’s political leadership keeps trumpeting out that their austerity policies actually worked. They are closely backed by their media outlets. Alas, the following story in the EU Observer:

Cash-strapped Greece recorded its first primary budget surplus in a generation last year, according to data released by Eurostat on Wednesday (23 April). Excluding interest on its debt repayments and a number of one-off measures to prop up its banks, Athens recorded a surplus of €1.5 billion, worth the equivalent of 0.8% of its economic output in 2013. Despite this, Greece still recorded an overall deficit figure of 12.7 percent, up by 4 percent on the previous year as the crisis-hit country endured a sixth straight year of recession.

As always, it is completely wrong to use the government budget as some sort of health indicator for how an economy is performing. To illustrate how dicey that can be, let us go over some numbers on the Greek economy.

First, GDP growth, measured as growth over the same quarter in the previous year:

Greece 2 1

If economic growth was any indicator, the jury would still be out on the Greek economy. It is somewhat of a relief that the contraction of the economy (“negative growth”) is slowing down – the figure for the last quarter of 2013 was -2.3 percent – but there were also two “spikes” of improvement during the ongoing recession, one in late 2009 and one in 2011.

The slowdown of the contraction that began in 2012 is still ongoing, though, which could mean that the Greek economy may actually start growing again some time in 2014. The question is what is behind this improvement. Since austerity policies are still being enforced, fiscal policy is suppressing domestic spending. Therefore, a good bet is that the “leveling out” of the long decline in Greek GDP is driven by an improvement in exports. Not surprisingly, Eurostat data show that Greek exports increased three quarters in a row during 2013. This is the longest period of improvement in exports since 2010.

If activity is improving in the exports industry, it would naturally translate into better GDP numbers, albeit limited compared to a sustained recovery in private consumption. QED. It would also translate into an improvement of government finances, as tax revenue would rise from growing corporate income. However, this improvement is probably not going to be strong enough to lift the Greek government budget to balance, thus it won’t help them end austerity.

So what, then, do Greek government finances actually look like?

Greece 3 1

If amplitude is a measure of stability, things do not look good for the Greek government. However, what the European press and its political leaders are raving about is the improvement of the budget deficit displayed as the very last data point in the chart above. There, the consolidated government budget is in a deficit of “only” 2.86 percent of GDP.  If this came on top of the weak but visible trend of smaller deficits from 2009 and on, there would be a reason to believe in a recovery. However, two variables call for a reality check: first, the exceptional dip in the second quarter, plunging the deficit into 30.4 percent of GDP; secondly, and much more importantly, the fact that the Greek GDP is still shrinking.

If the deficit improves as a ratio of a shrinking GDP, it means that tax revenues are shrinking as you improve your deficit ratio. This in turn means that you are making very drastic changes to tax rates as well as spending: tax rates have to go up and spending has to decline.

In other words, the only way to accomplish an improvement in the Greek deficit is to keep austerity in place. This in turn keeps the depression lid on domestic economic activity. So long as that lid is in place there is no chance for an improvement in overall economic activity.

In addition to GDP growth there is one variable that mercilessly tells the true story of how an economy is actually doing:

Greece 1 1

If the Greek GDP is indeed nearing a point where it will no longer shrink, and if the reason is a surge in exports, then the leveling out of the employment ratio is the best the Greeks are going to see for the foreseeable future. Their exports industry cannot pull the economy out of the recession anymore than it could pull Denmark out of its very deep recession in the late ’80s, or Sweden in the mid-’90s. So long as austerity remains in place, depression will still keep its tight grip on the Greek economy.

But just to make it worse… even if austerity was lifted, the Greeks would have little reason to expect a rapid return to better days. To see why, let us return to the EU Observer story:

The surplus [in the Greek budget], which was achieved a year ahead of the schedule set out in Greece’s rescue programme, means that it is entitled to further debt relief on its €240 billion bailout. Talks on debt relief, which is likely to involve lengthening the maturity of Greece’s loans to up to 50 years, will start among eurozone finance ministers following May’s European elections.

All the EU is doing here is kicking the can down the road. They are extending the Greek welfare state’s credit line over and over again. All the bailout programs really achieve is a recalibration of the welfare state, with higher taxes, lower spending and overall a more intrusive government that takes more from the private sector – at a lower level of private-sector activity.

And this is precisely the point here. The goal with austerity policies in Greece is to balance the Greek government’s budget. The goal is not to restore full employment; the goal is not to return to high levels of GDP growth; the goal is not to reduce the ranks of welfare and unemployment benefit recipients. No, the goal is to balance the budget. If the Greek government accomplishes that, they will be rewarded by the EU with more, longer-maturity loans.

In a “normal” welfare state the budget balances at something akin to full employment. However, that changes once a welfare state ratchets down into the depths of a protracted recession, such as the one Sweden experienced in the early ’90s and Europe has been struggling with since 2009. Austerity raises the tax ratio on GDP in order to make sure that government can pay for its spending obligations; spending cuts mitigate some of those tax increases. As taxes go up and spending shrinks, the government budget eventually clears, but at a GDP that provides much fewer jobs than before. In other words, after a long period of austerity, government can pay for its expenses without having as many taxpayers as before.

Once the economy starts improving, tax revenues will go up earlier in the recovery than they otherwise would. Since spending has been adjusted downward, this means in effect that government will begin over-taxing the economy way before it reaches full employment. In the Greek case, if austerity actually works the consolidated government will find itself running a surplus at an employment ratio 10-12 percentage points below what it was before the recession. 

Excess taxation thwarts private economic activity. Taxes themselves discourage productive investments and spending, but so long as government spends the tax money there is at least some return that mitigates the loss to the private sector. Taxation for a budget surplus, however, means that literally nothing is coming back into the economy. Every tax dollar is a full loss of economic activity, meaning that the budget surplus indiscriminately prevents the creation of new jobs.

The economy gets stuck at a low rate of employment. This is a perspective on the Greek economy that nobody outside of this blog is pointing to. Yet there is ample evidence that this is exactly what will happen – unless the Greek government replaces austerity with a long series of permanent, well-designed tax cuts.

There is historic experience to show that such policies could work very well. There is also historic experience to show that if you do not cut taxes, you perpetuate the depression you are in. For more on this, please be patient and wait for my book Industrial Poverty, out in late August.

Saving the Greek Welfare State

The welfare state crisis in Europe puts two acute problems on full display:

1. Big, redistributive government is killing prosperity in the developed world – it is high time to terminate it; and

2. That same big, redistributive government has trapped large segments of Europe’s population in a destructive dependency on government.

These two problems point to the same long-term solution, namely an end to the welfare state. At the same time, the wrong kind of termination will cause enormous harm to the hundreds of millions of Europeans who depend on government for their daily lives. The only way out is therefore to end the welfare state along a path to limited government that does not leave the poor behind.

Not everyone agrees on the need to follow that path. The idea that we should “just cut spending damn it” still has a large following, both among European economists of an Austrian slant and among American libertarians. This is surprising, especially since their slash-and-burn approach to the welfare state has already been tried in Europe. A couple of days ago the medical journal The Lancet reported on what this has meant to the Greek health care system:

Two main strategies can reduce [budget] deficits in the short term: cutting of spending and raising of revenue. The Greek Government used both at the behest of the Troika, albeit with an emphasis on reduction of public expenditure. … Cuts to public health spending Greece has been an outlier in the scale of cutbacks to the health sector across Europe. In health, the key objective of the reforms was to reduce, rapidly and drastically, public expenditure by capping it at 6% of GDP. To meet this threshold, stipulated in Greece’s bailout agreement, public spending for health is now less than any of the other pre-2004 European Union members.

The writers for The Lancet do not possess the expertise to realize that austerity as applied in Greece actually aims at saving the welfare state. The spending cuts and the tax increases are displays of a concerted – and very destructive – effort to slim-fit the welfare state into a smaller economy.

Nor do they seem to understand that in the short run it does not matter much whether austerity emphasizes tax hikes or spending cuts. (In the long run the balance between the two can make a notable difference. I elaborate on this point in my upcoming book Industrial Poverty.) At the massive scale that austerity has been put to work in Greece, a tax-hike laden policy strategy would have done at least as much damage to the Greek economy – and thereby to the government-run health care system – as the policies actually implemented.

But be that as it may. Let’s go back and listen to their story:

In 2012, in an effort to achieve specific targets, the Greek Government surpassed the Troika’s demands for cuts in hospital operating costs and pharmaceutical spending. The former Minister of Health, Andreas Loverdos, admitted that “the Greek public administration…uses butcher’s knives [to achieve the cuts].” The negative effects of these cuts are already beginning to manifest. Prevention and treatment programmes for illicit drug use faced large cuts, at a time of increasing need associated with economic hardship. In 2009–10, the first year of austerity, a third of the street work programmes were cut because of scarcity of funding, despite a documented rise in the prevalence of heroin use. At the same time, the number of syringes and condoms distributed to drug users fell by 10% and 24%, respectively. These events had the expected eff ects on the health of this vulnerable population; the number of new HIV infections among injecting drug users rose from 15 in 2009 to 484 in 2012 and preliminary data for 2013 suggest that the incidence of tuberculosis among this population has more than doubled compared with 2012.

This is an excellent example of why government should not be involved in the health care business in the first place. Legislators have taken over the responsibility for caring for drug addicts – and done so based on one particular ideology, namely that it is the right thing to do to give them free drug paraphernalia. By taking over the provision of said paraphernalia, government crowds out any initiative in the private sector to either provide the same products or to care for the drug addicts in some other way.

Then, when government runs into serious fiscal trouble and has to cut or terminate the programs it has put in place, there is nobody there to catch those who have become critically dependent on government.

Fortunately, there is a way out of this. We’ll get back to it in a minute. Now, more from The Lancet:

Additionally, drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito-spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years. Through a series of austerity measures, the public hospital budget was reduced by 26% between 2009 and 2011, a substantial drop in view of the fact that expenditure should have increased through automatic stabilisers. … Rural areas have particular difficulties, with shortages of medicines and medical equipment. Another key cost targeted by the Troika was publicly funded pharmaceutical expenditure … The stated aim was to reduce spending from €4·37 billion in 2010 to €2·88 billion in 2012 (this target was met), and to €2 billion by 2014. However, there have been many unintended results and some medicines have become unobtainable because of delays in reimbursement for pharmacies, which are building up unsustainable debts. Many patients must now pay up front and wait for subsequent reimbursement by the insurance fund.

It is very important to understand how the welfare state works. By providing entitlements such as the subsidies in Greece for prescription drugs, it makes people adjust their lives, their spending habits, their entire private finances, to the existence of these entitlements. Furthermore, the taxes needed to pay for these entitlements severely restrict their opportunities to set aside money for alternatives in the event the entitlements are terminated.

The more entitlements government offers, the more people adjust their lives to those entitlements – and to the taxes that pay for them. There comes a critical point where government, by means of its welfare state, essentially monopolizes the way of life people can have. This makes the damage done by austerity all the more widespread through the economy.

When people lose access to the entitlements they relied on, they have to cut spending elsewhere to get what government once provided for free or at a heavy subsidy. This reduces spending in the private sector, forcing small businesses in, e.g., retail to slash employees.

The key problem here is not the spending cut, but the fact that it is paired with either constant or higher taxes. In Greece, government raised taxes while slashing spending – the same recipe applied all over Europe as far back as Sweden in the early ‘90s and Denmark in the ‘80s – which effectively creates a big drainage of resources from the private sector into government coffers. However, since government is not spending more, but less, the net effect is a decline both in government spending and in private-sector activity.

If on the other hand spending cuts are combined with tax cuts, and if those tax cuts are targeted to maximize the benefit to those losing the most from entitlement cuts, then the private sector has a fighting chance to step in and replace government. Once they are out of government dependency, obviously people will be able to handle health care costs with the ups and downs in their private finances in the same way as they today handle the costs of housing, feeding, clothing and transporting themselves around.

But that is not what the Europeans have in mind. This kind of government rollback is nowhere on their horizon. For this reason, we are going to hear more stories out of Europe, like the one we are listening to from The Lancet:

Findings from a study in Achaia province showed that 70% of respondents said they had insufficient income to purchase the drugs prescribed by their doctors. Pharmaceutical companies have reduced supplies because of unpaid bills and low profits. Despite the rhetoric of “maintaining universal access and improving the quality of care delivery” in Greece’s bailout agreement, several policies shifted costs to patients, leading to reductions in health-care access. In 2011, user fees were increased from €3 to €5 for outpatient visits (with some exemptions for vulnerable groups), and co-payments for certain medicines have increased by 10% or more dependent on the disease. New fees for prescriptions (€1 per prescription) came into effect in 2014. An additional fee of €25 for inpatient admission was introduced in January 2014, but was rolled back within a week after mounting public and parliamentary pressure. Additional hidden costs—eg, increases in the price of telephone calls to schedule appointments with doctors—have also created barriers to access.

These fees may not sound like much, but we have to remember that they are imposed on an economy where people have lost 25 percent of their total gross incomes in five short years, where unemployment is three times the U.S. level and where other costs of living, primarily taxes, have gone up. Government is still claiming a monopoly on providing health care, trapping people in an ever more austere system with no way to get to the alternatives.

Then The Lancet makes an observation that, so far, this blog has been almost entirely the only voice for:

If the policies adopted had actually improved the economy, then the consequences for health might be a price worth paying. However, the deep cuts have actually had negative economic eff ects, as acknowledged by the International Monetary Fund. GDP fell sharply and unemployment skyrocketed as a result of the economic austerity measures, which posed additional health risks to the population through deterioration of socioeconomic factors.

In other words, if austerity was a good idea, the Greek economy should be rip-roaring by now instead of, as The Lancet notes in conclusion, having to suffer through yet more of the same policies:

At the time of writing, the Troika was in Athens to assess the implementation of the bailout conditions, and €2·66 billion in cuts were announced to the health and social security budget for the following year.

Austerity is nothing more than an attempt at saving the welfare state from a crisis it caused. Nothing short of a real government rollback – a structural phase-out of the welfare state – is going to work. That holds true for Europe as well as the United States.

EU Stagnation: More Evidence

The search for a European economic recovery continues. On February 4 British newspaper The Guardian reported that while there were somewhat disappointing news out of the United States, the European should be seeing some lights in the tunnel:

The Dow has fallen close to 5% since its all time high at the end of the year, dropping in part on fears that China’s growth is slowing and amid signs of more economic woes in emerging markets. There was stringer manufacturing data in Europe, where Greece’s factory sector was shown to have finally returned to growth for the first time in more than four years, fuelling hopes that the country’s long slump could be easing. The news of rising orders and activity for Greece’s manufacturers came amid evidence of a manufacturing recovery continuing in much of the eurozone.

We have heard these news about a European recovery several times recently, and previously it has turned out to be a macroeconomic henhouse made out of a feather. To check whether or not this is true this time, let us review some Eurostat national accounts data.

Since we do not yet have annual numbers for the European economies for 2013, quarterly data will have to do. That is not a bad idea, though, because if calibrated correctly they can give us a fine-tuned picture of what is happening on the ground. Thus, using quarterly national accounts data, adjusted for inflation, we find the following:

1. GDP growth in the 28 member states of the EU together was 0.4 percent in the third quarter of 2013 over the third quarter of 2012. This is the first positive growth number since the first quarter of 2012 (0.7 percent) which is worth noticing. At the same time, the euro zone exhibited zero growth in the third quarter of last year, admittedly an improvement over five straight quarters with shrinking GDP but hardly anything to write home about. The difference between the two growth rates suggests that it is better to stay out of the euro zone than to be part of it. Sure enough, if we isolate growth rates for the third quarter of 2013 (again over third quarter 2012) we find that out of the eleven EU member states that have a growth rate in excess of one percent, only three – Germany, Ireland and Luxembourg – are part of the euro zone. For example, the British economy outgrew the German, if only by a tenth of a percent. The explanation of this is most likely that the EU-ECB-IMF troika has targeted euro-zone countries for harsh austerity measures, allowing the non-euro EU states to more or less escape the tough fiscal repression. Greece is a good example, with a GDP growth rate of -3.0 percent. A positive side to this number is that it is the smallest quarterly GDP contraction in at least two years, but it also means that all talk about the Greek economy being in a recovery phase is nonsense.

2. Eurostat does not compile data on household consumption in the form of year-to-year quarterly consumption growth. However, they do report it for 23 member states. Of those, seven report a growth rate of one percent or more, while nine report shrinking private consumption. The unweighted average growth rate is 0.5 percent, which goes well with the GDP growth rate in the EU-28 (in normally functioning economies private consumption is the single largest contributor to GDP). Again looking at Greece, it ranks lowest of the 23 with consumption contracting 3.9 percent in the third quarter of 2013 over the same quarter 2012. Again, this is better than previous quarters: we have to go back to the third quarter of 2011 to find a less depressing figure (-2.5 percent). This is of course a good sign in itself, and we could add that the contraction rate fell throughout 2013 (with fourth-quarter numbers still not reported). That said, we could be looking at the same type of temporary relief as the third quarter of 2011 delivered: the first and second quarters of that year saw major contraction rates in private consumption (-12.3 and -6.5 percent, respectively). I don’t think that is the case, because overall it seems like the European economy in general, and the Greek economy in particular, are leaving the depression phase they have been in over the past few years. That, however, does not mean that they are heading for a recovery – far more likely is that we are witnessing the emergence of long-term economic stagnation.

3. Now for the manufacturing numbers. EU-28 saw a 0.4 percent growth rate in the third quarter of 2013, with the euro zone at 0.1 percent. With Eurostat figures from 24 of the 28 EU states we can conclude that there are vast differences between individual member states. Six states saw manufacturing grow at more than two percent; another eight experienced a growth rate of zero to one percent. In ten states manufacturing declined, led by Cyprus (-5.4 percent), Croatia (-5.4) and – yes – Greece (-5.2). Admittedly, one quarter figure does not a full story make, but the Greek situation does not improve much if we look back through the past few quarters. Before the significant decline in the third quarter, Greece saw four straight quarters of growing manufacturing. The average for those quarters was 2.3 percent, which does not compare well to the nine percent quarterly average loss in the four quarters prior to that growth period. In other words, while there has been some comeback for Greek manufacturing since early 2012, the nosedive in the third quarter shows that it is far too early to draw any definitive conclusions.

More than being a sign of a recovery, these Eurostat numbers reinforce the point I have made earlier that the Greek economy is transitioning from depression to stagnation. The same is true for the rest of Europe.

Beyond that, it is interesting to note the emerging difference between the euro-zone countries and members of the EU that still maintain their own currencies. Again, the better performance in non-euro EU states is probably not related to exchange-rate fluctuations benefitting foreign trade, the difference. Instead, it is a matter of austerity enforcement: the ECB obviously has no direct influence over non-euro states, which leaves the fiscal policy in somewhat better shape there.

Greek Bailout, Episode III

Never bark at the big dog. The big dog is always right.

If your goal is to restore growth and full employment in a crisis-ridden economy, don’t use austerity. It does not work. I have explained this for two years now – in blogs, research papers and numerous debates – and I am pleased to say that my work has been recognized. One step forward on that front is my book, out in July. But more important than the recognition of my work is the constant reminders of austerity failure that reality provides. In addition to raw, statistical evidence of decline and stagnation all over Europe, the German government is now de facto conceding defeat on the austerity front. From British newspaper The Guardian:

Germany has signalled it is preparing a third rescue package for Greece – provided the debt-stricken country implements “rigorous” austerity measures blamed for record levels of unemployment and a dramatic drop in GDP. The new loan, outlined in a five-page position paper by Berlin’s finance ministry, would be worth between €10bn to €20bn (£8bn-16bn), according to the German weekly Der Spiegel, which was leaked the document. Such an amount would chime with comments made by the German finance minister, Wolfgang Schäuble, who, in a separate interview due to be published on Monday insisted that any additional aid required by Athens would be “far smaller” than the €240bn it had received so far.

So how can the German government be admitting it has lost the austerity fight against the economic crisis, when it actually demands more austerity by the Greek government? Simple: the German government together with assorted Eurocrats from Brussels have sold last two fiscal-disaster packages as “the” fix for the crisis. If only Greece agreed to this-or-that austerity measure, and then got a loan, then the Greek economy would be on a fast track to a recovery.

By now proposing not a second, but a third bailout for the Hellenic welfare-state wasteland the German government is de facto admitting that the prior two packages did not at all deliver as promised.

Which, of course, is an outstanding reason to try the same policies a third time while expecting a different outcome…

The Guardian again:

The renewed help follows revelations of clandestine talks between Schäuble and leading EU figures over how to deal with Greece, which despite receiving the biggest bailout in global financial history, continues to remain the weakest link in the eurozone. The talks, said to have taken place on the sidelines of a Eurogroup meeting of eurozone finance ministers last week, are believed to have focused on the need to cover an impending shortfall in the country’s financing and the reluctance Athens is displaying to enforce long overdue structural reforms.

It is a bit unclear what the “structural” element of those reforms would be, but if the history of Greek bailouts is any indication we can safely assume that the “reforms” would be higher taxes and lower entitlement spending. While less spending is highly desirable, it has to come in the form of predictable reductions – and they have to be coupled with targeted tax cuts that give those dependent on government a fighting chance to provide for themselves once the government handouts are gone.

Such reforms are not rocket science. Two years ago I put together five such proposals in a book. I would not expect the Greek government to have read it, or that any Eurocrat would have seen it… but the basic idea – permanent spending cuts coupled with targeted tax cuts – is so common-sensical that you would expect someone in Europe to propose it as a guideline for getting Greece, and Europe, out of its crisis.

So far, though, I have not seen a single proposal for “structural reform” in Greece along these lines.

Perhaps it is understandable, at the end of the day, why no such ideas are floating around in the public debate. After all, the end result is a dismantling of the welfare state, an idea as alien to Europeans as a monarchy is to Americans. But so long as Europe’s political leaders remain married to the welfare state, they will also have to continue to come up with non-solutions to the crisis. One of those solutions is another debt write-down. The Guardian again:

Most of the debt overhang now haunting the country belongs to European governments and at 176% of GDP – up from 120% of national output at the start of the crisis – is not only a barrier to investment but widely regarded as being at the root of its economic woes. “They are missing the point: Greece does not need a third bailout, it needs debt restructuring,” said the shadow development minister and economics professor, Giorgos Stathakis. “Even in the IMF, logical people agree there is no way we can have any more fiscal adjustment when the whole thing has reached its limits,” he said. “There is simply no room for further cuts and further taxes and that is what they are going to ask for.”

It is precisely this attitude that traps Greece in a perpetual crisis. Its plunge into industrial poverty over the past five years was not caused by a financial crisis, as public economic mythology suggests. The plunge was the work of the welfare state, which over a long period of time had drained the private sector of money, entrepreneurship, investments and productivity. When the global recession hit, the excessive cost of the welfare state was exposed full force. Trying first and foremost to save the welfare state, Eurocrats from the EU and the ECB joined forces with economists from the IMF to squeeze even more taxes out of the private sector. At the same time, the rapidly growing crowds of unemployed and poor were deprived of more and more of the only thing that had kept them going: welfare-state handouts.

The result was that those who saw their handouts shrink were even less able to find a job than they had been before. Rising taxes killed the job market for them.

At the core, the Greek crisis is one of a welfare state that costs vastly more than the private sector of the Greek economy can afford, even on a good day. The debt that the good professor and fellow economist Stathakis wants to have forgiven is the result of this historic mess of irresponsible entitlements and burdensome taxes.

If Greece does not fix its welfare-state problem, it does not matter how much debt that is forgiven. It will continue to accumulate more debt, and then what? Another round of debt forgiveness?

Again, this basic insight is missing from the European discussion on what to do with Greece. Even the IMF is apparently concentrating on the debt burden, suggesting, according to the Guardian, that “without additional debt relief by eurozone governments, Greece’s debt burden could smother the country’s economy.” That is exactly wrong: the economy is being smothered by the welfare state, which austerity measures are aimed at saving.

At least there is some common sense in the debate. The Guardian concludes:

China, Brazil, Argentina, India, Egypt and Switzerland have been among the countries expressing grave doubts that the assistance would work, arguing that Greece might end up worse off after the austerity programme.

Thank you for that. Let’s now hope that more people see this and that we can get some traction for a reform program that combines entitlement phase-out with targeted tax cuts. It is the only way to save Greece from generations of industrial poverty – and it is the only way to save the rest of Europe from the same fate.